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Second-best tax policy in a growing economy with externalities

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  • Cassou, Steven P.
  • Hamilton, Stephen F.
  • Gorostiaga Alonso, Miren Arantzazu
  • Gutiérrez Huerta, María José

Abstract

This paper investigates the exploitation of environmental resources in a growing economy within a second-best scal policy framework. Agents derive utility from two types of consumption goods one which relies on an environmental input and one which does not as well as from leisure and from environmental amenity values. Property rights for the environmental resource are potentially incomplete. We connect second best policy to essential components of utility by considering the elasticity of substitution among each of the four utility arguments. The results illustrate potentially important relationships between environmental amentity values and leisure. When amenity values are complementary with leisure, for instance when environmental amenities are used for recreation, taxes on extractive goods generally increase over time. On the other hand, optimal taxes on extractive goods generally decrease over time when leisure and environmental amenity values are substitutes. Unders some parameterizations, complex dynamics leading to nonmonotonic time paths for the state variables can emerge.

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Bibliographic Info

Paper provided by University of the Basque Country - Department of Foundations of Economic Analysis II in its series DFAEII Working Papers with number 2006-03.

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Date of creation: Oct 2006
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Handle: RePEc:ehu:dfaeii:200603

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Postal: Dpto. de Fundamentos del Análisis Económico II, = Facultad de CC. Económicas y Empresariales, Universidad del País Vasco, Avda. Lehendakari Aguirre 83, 48015 Bilbao, Spain
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Keywords: elasticity of substitution; second-best policy; growth and the environment;

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References

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  1. Gorostiaga Alonso, Miren Arantzazu & Cassou, Steven P., 2007. "Optimal fiscal policy in a multisector model with minimum expenditure requirements," DFAEII Working Papers 2007-01, University of the Basque Country - Department of Foundations of Economic Analysis II.
  2. Bovenberg, A Lans & van der Ploeg, Frederick, 1992. "Environmental Policy, Public Finance and the Labour Market in a Second-best World," CEPR Discussion Papers, C.E.P.R. Discussion Papers 745, C.E.P.R. Discussion Papers.
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  10. Arantza Gorostiaga, 2002. "Should Fiscal Policy Be Di.erent in a Non-Competitive Framework?," Economic Working Papers at Centro de Estudios Andaluces, Centro de Estudios Andaluces E2002/11, Centro de Estudios Andaluces.
  11. Auerbach, Alan J. & Hines, James Jr., 2002. "Taxation and economic efficiency," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 3, chapter 21, pages 1347-1421 Elsevier.
  12. Steven P. Cassou & Kevin J. Lansing, 2004. "Tax reform with useful public expenditures," Working Papers in Applied Economic Theory, Federal Reserve Bank of San Francisco 98-09, Federal Reserve Bank of San Francisco.
  13. Cassou, Steven P. & Hamilton, Stephen F., 2004. "The transition from dirty to clean industries: optimal fiscal policy and the environmental Kuznets curve," Journal of Environmental Economics and Management, Elsevier, vol. 48(3), pages 1050-1077, November.
  14. Kenneth L. Judd, 1982. "Redistributive Taxation in a Simple Perfect Foresight Model," Discussion Papers, Northwestern University, Center for Mathematical Studies in Economics and Management Science 572, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  15. Arantza Gorostiaga, 2004. "Optimal Fiscal Policy with Rationing in the Labor Market," Economic Working Papers at Centro de Estudios Andaluces, Centro de Estudios Andaluces E2004/10, Centro de Estudios Andaluces.
  16. V. V. Chari & Lawrence J. Christiano & Patrick J. Kehoe, 1993. "Optimal Fiscal Policy in a Business Cycle Model," NBER Working Papers 4490, National Bureau of Economic Research, Inc.
  17. Goulder Lawrence H., 1995. "Effects of Carbon Taxes in an Economy with Prior Tax Distortions: An Intertemporal General Equilibrium Analysis," Journal of Environmental Economics and Management, Elsevier, vol. 29(3), pages 271-297, November.
  18. Albert Marcet & Thomas J. Sargent & Juha Seppala, 1996. "Optimal taxation without state-contingent debt," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 170, Department of Economics and Business, Universitat Pompeu Fabra, revised Oct 2001.
  19. Chamley, Christophe, 1986. "Optimal Taxation of Capital Income in General Equilibrium with Infinite Lives," Econometrica, Econometric Society, Econometric Society, vol. 54(3), pages 607-22, May.
  20. Jones, Larry E & Manuelli, Rodolfo E & Rossi, Peter E, 1993. "Optimal Taxation in Models of Endogenous Growth," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(3), pages 485-517, June.
  21. James M. Poterba, 1993. "Global Warming Policy: A Public Finance Perspective," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 7(4), pages 47-63, Fall.
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  23. Gorostiaga Alonso, Miren Arantzazu, 1999. "Should Fiscal Policy be different in a Non-Competitive Framework?," DFAEII Working Papers 2002-28, University of the Basque Country - Department of Foundations of Economic Analysis II.
  24. Judd, Kenneth L., 1999. "Optimal taxation and spending in general competitive growth models," Journal of Public Economics, Elsevier, Elsevier, vol. 71(1), pages 1-26, January.
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Cited by:
  1. Gorostiaga Alonso, Miren Arantzazu & Cassou, Steven P., 2007. "Optimal fiscal policy in a multisector model with minimum expenditure requirements," DFAEII Working Papers 2007-01, University of the Basque Country - Department of Foundations of Economic Analysis II.

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